After months of crises and negotiations, a Grexit (the latest term for a Greek euro exit) is as topical as ever. But how can a small Mediterranean country have such a disproportionate effect on the world’s largest trading bloc? agendaNi asked PwC Chief Economist Dr Esmond Birnie why we should care.
Why is there a Greek crisis?
Greece was living well beyond its means even before it joined the euro; and when it did join, things got worse as the Greek Government could for the first time borrow at German interest rates. So, when the global downturn hit, a combination of years of sky-rocketing public spending and widespread tax evasion meant Greece could neither pay its debts nor sustain its economy.
Since 2010, a €240 billion bailout, loan write-offs, renegotiations and a 6 per cent annual decline in the economy has fermented widespread civil unrest, two general elections and a growing fear that Greece would be forced to leave the euro and potentially default on €356 billion of foreign debt.
The second Greek election outcome was a best case scenario for the euro, with the pro-bailout New Democracy party and its leader, Antonis Samaras, bolting together a ruling coalition. That’s the good news for euro supporters as it quashes fears of an immediate and messy Greek euro exit.
The bad news is that the fundamental problem of how Greece can pay its way within the European currency union hasn’t been fixed.
Samaras fought an election to keep Greece in the euro, but he also pledged to re-negotiate the hair-shirt austerity bailout that triggered the election in that first place. That means Greece and its creditors are back at the table for yet more negotiations.
How does this become a euro zone crisis?
First, because if Greece leaves the euro and re-introduces the drachma, that will quickly devalue, making it even more likely that Greece will be default on existing debt. And with UK banks alone owed €9.2 billion, and French banks much more heavily exposed to the tune of €41.4 billion, that shock will impact on banking confidence.
Second, investors will stop buying government bonds from other vulnerable economies like Italy, Spain and Portugal and those governments, in turn, won’t be able to pay their creditors. Savers will shift their money to ‘safer’ banking locations in, say, Germany or the UK, leading to potential banking defaults.
Third, the collective impact of this would be to undermine confidence in the global banking system, triggering another credit crunch.
How would that impact on Northern Ireland?
Well, of the 125,000 Northern Ireland jobs created in the decade to 2008, we’ve already lost over 30,000 thanks, directly and indirectly, to the credit crunch. Yet another credit crunch will take another heavy toll on employment and push the region deep into recession.
The latest Fraser of Allander report has calculated that the direct result of a Greek euro zone exit would be a 1 per cent decline in UK GDP growth. In Scotland alone, Fraser of Allander says 49,000 jobs would be lost and the Scottish economy would decline by 1.2 per cent.
So the impact could be very severe; whether it would be catastrophic would depend on what would happen next to the other heavily indebted euro countries.
But there’s not much the Executive can do about it, is there?
Not a lot but some opportunities exist.
First, understand the problem and its implications. Locally we need to know what could happen and what the impact might be for Northern Ireland. We’ve developed a PwC report and action plan that is going to our clients; some of it is on our website, but every company needs to know.
Second, we need to encourage new export strategies. In the past 14 years, the overall level of external sales has increased and RoI now accounts for approximately 40 per cent, Europe for 20 per cent, North America 18 per cent, and the rest of the world has increased to 22 per cent.
However, the overall level to the BRICs1 remains low at no more than 3 per cent and given the low absolute volume of sales to the BRICs (£123 million in 2010), boosting that could be a real coup.
Finally, we need to drive up productivity amongst both our indigenous and overseas-owned companies. There is no quick fix for the euro zone, but increasing knowledge, exports and productivity would be a good start.